9 Accounts Receivable
NRV and the Allowance Method
Companies use an A/R Aging SummaryA/R Aging Summary:
A detailed account of accounts receivable (A/R) that reports the aggregate balance of receivables due within 30 days and overdue accounts (invoiced within 31-60 days; 61-90 days; and 91+ days). The A/R aging summary provides information to help companies accelerate receipt of A/R and estimate the collectible portion of A/R due from customers. See also: Allowance method. and estimate the percentage of A/R that is uncollectible from past experience. An A/R aging summary looks like this:
Still Co.
31 December 20X0
A/R Aging Summary
| Days in Accounts Receivable | Amount |
|---|---|
| 0–30 days | 630,000 |
| 31–60 days | 15,200 |
| 61–90 days | 4,000 |
| Over 90 days | 1,600 |
| Total A/R | 650,800 |
Still estimates that 1% of A/R outstanding 0-30 days will be uncollectible; 10% of A/R outstanding 31-60 days will be uncollectible; 30% of A/R outstanding 61-90 days will be uncollectible; and 80% of A/R outstanding over 90 days will be uncollectible.
We can therefore estimate Still’s Allowance for Doubtful Accounts by multiplying the amount outstanding in each of the categories by the rate uncollectible as follows:
| Days in A/R | Amount | × Rate | Total Estimated Uncollectable |
|---|---|---|---|
| 0–30 | 630,000 | 1% | 6,300 |
| 31–60 | 15,200 | 10% | 1,520 |
| 61–90 | 4,000 | 30% | 1,200 |
| > 90 | 1,600 | 80% | 1,280 |
| Totals | 650,800 | 10,300 |
Notice that this $10,300 is the total amount of A/R uncollectible. The presentation of A/R on the Statement of Financial Position will be:
| Accounts Receivable (gross) | 650,800 |
|---|---|
| Allowance for Doubtful Accounts | (10,300) |
| Accounts Receivable (net) | 640,500 |
Let’s do another example for practice. This one is similar to the Still Co. example we just did together.
Excellent! Make sure you look at the solution so you can check your work.
One last thing. What happens when a customer fails to pay? We have to write-offWrite-Off:
To reduce the net book value of an asset to its net realizable value (NRV). See also: Impairment, Obsolescence. the customer’s account. Write-off just means that we reduce A/R (gross) for the amount the customer isn’t going to pay back. In this way, the accounting records reflect that the customer doesn’t owe us anymore.
For example, if Still Co. determines that CustomerA Ltd.can’t repay their $2,400 owing because they went bankrupt, Still needs to show $0 owing on CustomerA’s account. So we know the A/R (gross) balance goes down when accounts are written off. And A/R (gross) decreases with a credit.
| DR | ?? | 2,400 | ||
| CR | A/R (CustomerA) | 2,400 |
But what is the debit in this journal entry? Although our first instinct may be to debit bad debt expense, that would be incorrect because we only use the Bad Debt expense account when we adjust Allowance for Doubtful Accounts. We record bad debt expense as an estimate of how much is not going to be collected, and Allowance for Doubtful Accounts is holding all the potentially uncollectible amounts until we can identify exactly which specific customer accounts won’t be paid back. Once we’ve identified a specific account (such as CustomerA), we can draw on the Allowance for Doubtful Accounts account like this:
| DR | Allowance for Doubtful Accounts | 2,400 | ||
| CR | A/R (CustomerA) | 2,400 |
Let’s write out the Statement of Financial Position presentation for A/R after the write-off:
| Accounts Receivable (gross) | (650,000 – 2,400) | 648,400 |
|---|---|---|
| Allowance for Doubtful Accounts | (10,300 – 2,400) | (7,900) |
| Accounts Receivable (net) | 640,500 | |
Take a look – A/R (net) hasn’t changed! But A/R (gross) and Allowance for Doubtful Accounts have both decreased.
Try writing off a customer’s account, then check your work against the solutions. You’ve got this!